The new tax law is full of good (and bad) changes to the tax law. I’ve put together a list of tax law changes that you may not have heard about, but nonetheless could be a welcomed surprise when you file your taxes in 2019 for the 2018 tax year.

The Child Tax Credit just got bigger and more taxpayers will qualify for the credit

This change was HUGE!

Under the old tax law, a taxpayer could claim a tax credit of up to $1,000 per child under the age of 17. The credit began to phase out for taxpayers with an adjusted gross income (AGI) of $75,000 for single filers and $110,000 for married filers.

Under the new law, the credit has been doubled to $2,000 and the phaseout limitation has changed to $200,000 for single filers and $400,000 for married filers.

For a simple married couple making $200,000 jointly with two children, they would go from having zero child tax credit under the old law to receiving $4,000 of child tax credits ($2,000 for each child) in 2018.

For even more of a tax break, a $500 non-refundable credit is provided for certain non-child dependents.

So if mom or dad has moved back into your house, at least you will get a bit of a bonus back at tax time!

An increased Standard Deduction

Under the old law, the Standard Deduction for taxpayers who do not have enough individual deductions to itemize, were to be $6,500 for single filers, $9,550 for heads of household, and $13,000 for married individuals.

Under the new law, the Standard Deduction has increased to $12,000 for single filers, $18,000 for heads-of-household and $24,000 for married individuals filing a joint return

So who is this really a break for?

If you look at the itemized deduction form, a few of the biggest deductions on the form are mortgage interest and real estate taxes. It’s common that if you don’t have either of those deductions, you fail to qualify to itemize your deductions. So for individuals that live in apartments, don’t own a home and typically take the standard deduction, this could be a welcomed tax break. Also, this could be a break for individuals who have already paid off their mortgage and recently moved from always itemizing their deductions to taking the standard deduction.

Expanded use of 529 account

529 accounts are famously used as a tax-efficient savings vehicle for college. You can deposit funds into the account and receive a state tax deduction in some states (including Missouri). Once the funds are in the account, they can grow tax-deferred and if the funds are used for qualified higher education expenses, the funds can be withdrawn tax-free.

As part of the new tax act, qualified higher education expenses include tuition at an elementary or secondary public, private or religious school, up to a $10,000 limit per tax year.

If you are considering a private high school for your children, you can receive all the benefits of saving within a 529 plan account that would normally be reserved for college funds.

Temporary 100% first year depreciation deduction for business owners

Under the pre-Act law, taxpayers received an additional first-year bonus depreciation deduction equal to 50% of the basis of the qualifying property. The property had to be new property of which the original use began with the taxpayer.

The new tax law changed a 50% deduction to a 100% first-year deduction for qualified property placed in service after September 27, 2017. A big change is also removing the restriction that the property had to be new property and now the deduction is available for new AND used property.

The new tax break shouldn’t be confused with the Section 179 expense rules which are also used to fully depreciation new and used equipment. It should, however, give taxpayers another way to receive upfront deductions for business equipment purchases.

Passenger auto depreciation limits increased

Thinking of buying a car for your business?

The IRS limits on how much depreciation you can take each year on passenger autos in your business. Pre-tax Act, the maximum amount of depreciation you can take on a passenger auto was $3,160 for the first year, $5,100 for the second year, $3,050 for the third year and then $1,875 for the fourth year and later. As you can see, for a high-end passenger vehicle, it would take a long time to fully receive deductions for the entire cost of the vehicle.

Under the new law, the maximum amount of first year depreciation is increased to $10,000, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth year and later. This is a substantial increase from the pre-tax law depreciation amounts and allows for a quicker depreciation recovery period for higher-end passenger autos.

Taxpayers usually focus in on larger trucks and SUVs that are more qualified for higher business vehicle tax deductions. The increase in luxury auto depreciation limits makes buying a passenger vehicle for your business more appealing!

Hopefully, one of these five changes to the tax law will assist you at tax time. Maybe you will even look forward to having your taxes completed in 2019!

Tax reform is on the way. At Stopp & VanHoy we are on top of the changes and will have complete coverage of all the planning you need for your business. The tax law will be effective for the 2018 tax year. That means there is still time to make last minute changes in 2017 that could have a significant tax impact for you.

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut. The strategy is to take advantage of lower tax rates next year by deferring income into next year.

Take a look at the suggestions listed below and see if any one of these last minute moves are ones you should be making:

Roth Conversions – If you normally convert your regular IRA to a Roth IRA, postpone your move until next year. That way you can take advantage of the lower tax rates in 2018. If you have already completed your Roth Conversion this year, there is still hope! You can unwind the conversion by completing a Roth recharacterization. However, you must complete the recharacterization by year-end. As part of the new tax law, Roth recharacterizations will no longer be available starting in 2018.

Businesses – If you are one of the many small businesses that operate on the cash method of accounting (which means income is taxed when your clients pay), then you might want to hold off on sending those invoices to clients until after year-end. Payments collected in 2017 will be taxed under the 2017 tax rates. Whereas payments collected in 2018 will be taxed under the lower 2018 tax rates.

Changes in Itemized Deductions

The new tax law reduces many popular itemized deductions for a bigger standard deduction. Here are moves you can make now to take advantage of the new law.

Tax Deductions – Individuals will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But, don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only limited prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.

Charitable Contributions – The itemized deduction for charitable contributions won’t be removed or decreased. However, since most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

Medical Expenses – The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated, and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Employee Business Expenses – Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

As an individual taxpayer, these are a few of the tax saving moves you can make before year-end. If you own a business, even more avenues are available. The common theme is to take deductions now as certain deductions are going away as well as deferring income into later years to take advantage of lower tax brackets.

Keep a lookout for our next communications as we go into more detail on these new rules and how the new rules can be used to your benefit.

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